insight
工程技術，地產投資，信仰家園，時尚生活
DUBLIN has its pubs, London has Trafalgar Square and New York, Times Square. In humid and rainy Singapore, however, the top hang-out spot of choice for food, shopping or leisure is probably the ubiquitous air-conditioned shopping centre.
There are more than 80 malls in Singapore, scattered over all parts of the island, usually located near an MRT station. What investors might not know is that they can invest in at least a quarter of these and collect dividends through the rental income mall landlords receive. They can also invest in malls in other markets too, such as Hong Kong, China, and Indonesia.
Today, we introduce the drivers of the industry behind the retail real estate investment trust (Reit) sector, which is arguably one of the more stable and defensive sectors in Singapore. This week's piece is focused more on a general look at the industry, its opportunities and challenges. A future piece will describe and evaluate individual retail Reits.
Reits are financial vehicles where companies park property assets to enjoy tax advantages. Shopping malls are popular assets to be put into a Reit structure. Reit investors tend to look for stability and income, instead of explosive growth. This is especially true of retail malls, and a subset of retail malls located in Singapore's heartlands known as suburban malls.
After all, rents cannot be doubled overnight, and tenancy levels, usually near 100 per cent, have little upside. But shopping centres can still make money.
Performance drivers
Some factors that drive higher profits are within the control of a Reit manager. The top strategy is what is known in industry jargon as the asset enhancement initiative, or AEI for short.
AEIs are essentially renovation. People renovate their houses to make smarter use of space. They knock down walls to make a room bigger. They give the home a more comfortable and liveable look by laying new tiles, slapping a fresh coat of paint on the walls, and installing high-quality kitchen appliances as well as brighter lights.
Similarly, a smart mall manager will turn an awkward corner into a mobile accessory shop or bubble tea kiosk; escalators can be shifted to improve traffic flow; carpark space can be turned into shops to generate higher rental income; a more modern look will attract younger shoppers. With so many malls in Singapore, the older ones eventually lose their lustre and have to be renewed.
Another factor landlords think about is the tenant mix. What shops appear in malls are a two-way process: potential tenants apply for leases, and landlords try to bring in certain coveted brand names. A basement area that would otherwise stay quiet can be livened up by the right mix of popular restaurants and a supermarket. After dinner, people typically buy some groceries before heading home.
Controlling the tenant mix is an art as well as a science. The science is in analysing the industry the prospective tenant is in, and the tenant's own business operations. This ensures rent can be paid on time. If the tenant is profitable, rentals can be increased after leases, typically on three-year terms, are up.
The art is in figuring out what kind of shoppers the mall should focus on attracting, identifying the latest trends and designing the mall and tenant mix accordingly.
Having the right tenant mix is critical to a mall's performance. Barely one month after the former Iluma mall beside Bugis Junction opened its doors in 2009, some retailers began having discount sales. Perhaps their offerings were too niche. Perhaps Bugis Junction, located on top of Bugis MRT, offered strong competition. A bridge from Bugis Junction also did not link directly to the mall.
Iluma's fortunes seem to have turned around after CapitaMall Trust bought it in 2011 for $295 million and spent $38 million revamping it, reopening it in 2012. At end-2013, the mall, now renamed Bugis+, pulled in net property income of $21.3 million - a decent 6.5 per cent net property income yield on its new valuation of $330 million.
External factors
While mall managers can redesign the mall through AEIs and reshuffle the tenant mix, some factors will remain out of their control.
One key factor is the mall's location. This can only be controlled when the Reit manager is deciding whether to acquire the mall. Location will impose constraints on shopper flow. Those located right next to MRT stations will have the advantage, be it Bugis Junction and the former Iluma mall, or Somerset 313 versus neighbouring Orchard Central.
Related to location is who lives nearby. This is referred to as a mall's catchment area. Some malls attract a higher-spending crowd than others, and can thus charge their retailers higher rents.
Suburban malls with grocery chains and movie theatres will always have a captive audience. After a long day at work, it is far more convenient for a family to walk to the nearest shopping centre for dinner, entertainment, and a trip to NTUC FairPrice, than drive or take public transport to another part of town.
Another factor that is controlled upon purchase is size. Malls that are bigger will have more flexibility to customise their tenant mix and offerings. People are attracted towards and are more likely to spend time in a place where they can do multiple things.
Economic trends also affect mall performance. Rising median incomes are a boon to suburban malls. People are encouraged to spend more if they are getting promoted and receiving bonuses.
Higher tourist visits will be a positive for malls along the Orchard Road shopping belt. Job creation and economic growth also affect spending patterns.
How the economy affects a mall depends on the tenant mix. An economic downturn will hit malls with many high-end shops, such as SPH Reit's Paragon, harder than a place catering to the mass market, such as Fraser Centrepoint Trust's Causeway Point.
An epidemic outbreak, such as Sars, might cause people to stay indoors instead of going out to shop. A mall such as Vivocity, which is near a ferry terminal and transit points to Sentosa island, will be hit more when people do not travel.
A serious economic downturn will make everyone tighten their belts, spending less at expensive restaurants and boutiques.
Market watchers also examine statistics on the total amount of retail space in Singapore. According to the latest CapitaMall Trust presentation slides, Singapore's retail floor space supply growth is estimated to slow down in the next five years to hit 65.5 million sq ft by 2018 from 61.1 million sq ft in 2013, compared to growth from 54.5 million sq ft in 2009.
A final indicator can be the retail sales index, published by the Department of Statistics. Retail sales growth has been shrinking in the past few years, in line with a slowing economy.
After the latest release this year, observers pointed out that shrinking retail sales in the past year might indicate growing usage of e-commerce platforms.Online threat
Is online shopping a threat to brick-and-mortar malls? Will retailers be doomed to have their shops become glorified showrooms while savvy consumers compare prices on their smartphones and ultimately make their purchases somewhere else?
In the US and other parts of the world, people shop online through Amazon and eBay. Estimated quarterly US retail e-commerce sales as a proportion of total quarterly retail sales have grown from 2 per cent in 2004 to 6 per cent today, according to the latest report from the US Census Bureau. Total e-commerce sales for last year were estimated at US$263 billion, up 17 per cent from 2012.
In China, the biggest player is Alibaba, which controls more than two fifths of the e-commerce market. It sells everything from apples and olive oil to motorcycles and used cars. Businesses around the world use it to run import-export operations. The company is preparing for an initial public offering in the US that values the company at about US$140 billion. Advertisers also use social media such as WeChat to market their products.
In Singapore, online shopping sites include Qoo10, Rakuten, Singsale, Zalora, mobile site Carousell, and online grocer Redmart. People also shop at British online store ASOS, vintage and handmade item store Etsy, supplement store iHerb, cosmetics supplier Luxola, just to name a few.
The advantage online shops have over their real-world counterparts is the lower set-up costs. For one thing, they do not have to worry about paying rent.
Consumers also like the convenience of browsing several sites at one go, instead of trudging from shop to shop looking for the best deal. Busy consumers with young children to take care of will find it more convenient to shop from home.
In addition, the disadvantages that dogged the early years of online shopping such as dodgy suppliers or credit card fraud are disappearing. Online shopping sites are becoming more reputable, consumers can buy from highly-rated suppliers who deliver on time and do not misrepresent their products, and e-payment systems are becoming more secure with payments authenticated through mobile phones and electronic passcode generators.
As online shopping takes off among a younger generation that grew up with the Internet, the composition of shops at Singapore's malls might change.
Certain items, such as electronics, books and nutritional supplements, can be easily compared online and purchased, with delivery to one's doorstep.
Other shops, notably clothes and shoes retailers, might still have a place in a shopping mall. This is because consumers can touch, see and try out these items on the spot, compared to wondering if digitally-enhanced pictures on the Internet can be trusted.
Restaurants, cinemas and supermarkets are unlikely to be replaced by the online threat.
To conclude, shopping malls in Singapore are here to stay in the foreseeable future. While they are not exciting investments, they can be reasonably profitable ones. A future piece will examine the 10 or so Reits listed here with exposure to the retail mall sector.
